By Alex Wynnyczuk, Commentary

Published 5:10 pm, Wednesday, February 26, 2014

A major subject of public discussion is the problem of increasing income inequality, and as the 2014 election campaign heats up, many candidates will join the discussion.

Some on the left often stress that poverty is the main reason for the inequality, and call for an increase in food stamps, an extension of unemployment benefits, and a raise of the minimum wage.

Some on the right — besides stressing the importance of social mobility rather than income inequality — often argue that income inequality is desirable because it is a precondition for economic growth. Their rationale is that high income people save more and invest their savings in productive businesses.

Both arguments fall short. The left touches only on part of the growing inequality problem. The right fails to explain what degree of inequality is beneficial for economic growth and how much inequality would actually hinder faster economic development. Neither do they explain why before 1980s, when the inequality was not only lower but declining, the economy grew pretty well.

Income inequality has been growing since about 1980, and is currently at the highest level since around 1928. It has been growing in two ways. Those at the top have been moving away from the rest of the population, with their share of total personal income doubled from 1980 to 2012.

The income differences among the remaining 99 percent have also been growing, to a large degree because of factors like globalization, new technologies, and shortcomings in our educational and training systems. Necessary changes to education and training would require a long time to have an effect on the economy.

However, in the short term, we can stimulate the growth of low wages and salaries by bringing about full employment. We did it in the late 1990s, when real wages actually increased.

The free market would put upward pressure not only on wages and salaries, but also force employers to devote more resources to train new employees, once the pool of unemployed workers was reduced.

The fastest way to reach full employment would be to free ourselves from the obsession with the budget deficit, and substantially increase investment in building and repairing our infrastructure. That would benefit our grandchildren more than lowering current budget deficit, as the public works of the 1930s benefited the baby boomers.

Then we could invest in the future of young people by introducing some kind of voluntary domestic peace corps, combined with providing better access to higher education, such as making community colleges free for every qualified applicant.

Such programs would not only provide young people with necessary education, but with work experience and some new skills.

As for the growing separation of top earners, the problem isn't caused by better education, but by various market imperfections. In a perfect market, excessive pay differences would be eliminated, but perfect competition in the labor market is impossible to achieve.

The government could at least stop furthering income inequality by reforming the tax system. Income, whether from labor or capital gains, should be taxed equally. Instead of special tax rates levied on dividends, we could do away with the corporate profit tax completely and tax profits, whether distributed or not, as personal income of shareholders.